Argentina’s economy is being strangled by the lockdown

by Pablo Martín Pozzoni

Argentina suffers from stagnant production, as well as a great recession. These problems have been exacerbated by the country’s recent default.

And now, Argentinians must deal with one of the most extreme economic lockdowns in the world. This means that every week Argentina is losing the equivalent of one GDP point per week. Against this backdrop, it is advisable to review, this time from an economic perspective, the effects of the most critical problem facing our third world nation: the “economic lockdown” an unconstitutional non-declared state of siege. There are increasing calls for a form of quarantine that would not destroy our incomes. 

Let us think of the entire production chain for any good: a product goes through several stages of production before reaching wholesale suppliers and sales companies. The process that all goods undergo is long and complex. Even industries that produce one product still generally require vast supply chains. If one part of the chain is closed, this can paralyse the whole production chain.

And the vital elements of the production chain – humans – are now at home, locked down, burning through their savings. Even if some of them can still rely on their salaries, they can only consume a limited amount of goods. Government subsidies are not arriving on time for families and factories, and they must also pay the same level of taxes than before the lockdown. A new part for a broken washing machine, a burnt out engine for a water tank that needs replacing, a non-serviceable telephone line, the lack of medicine or clinical analysis, etc., can destroy a family’s livelihood and further diminish the workforce.

The fixed costs and requirements of production pose another challenge. If the government forces ‘non-vital’ sectors to stop functioning there is no way to maintain many wider production chains. Workers in active industries cannot recover, and there is no time to transfer the labour force and machines from a less vital sector to the vital sectors. A company can go bankrupt due to a lack of spare parts, but for a short time, it can be “bailed out” by a similar company. However, this would happen at the expense of higher replacement costs: it requires the same goods from a shrinking number of companies, to replace the production of those companies that have fallen. Paraphrasing an ancient African proverb: It takes an entire market to create a commodity.

These chains are breaking one by one, and the government only resorts to monetary compensation, while pretending that the inflationary spillover will not occur, applying price controls and creating a shortage of consumer and capital goods. Consequently, companies cannot calculate the necessary investment and marginal rate of substitution.

Both sides of economic analysis – supply and demand – show the red flags of this flawed approach. To add to this economic “perfect storm”, Argentina depends on the public sector providers (who are dependent on the taxes on the private sector) that are not productive. Only a tiny portion of providers are usually dedicated to producing public goods such as security, hygiene, or public urbanisation. But most of the state-salaried work involves useless or corrupt nepotist bureaucracies and unnecessary jobs for the material reproduction of society in countless ministries. And most of the beneficiaries of the State do not perform any function or work within it, but live on social welfare plans that reinforce their status as lumpenproletariat.

In short: all members of the active and genuinely productive population are faced with a shortage of goods and public services. And this is happening now in quarantined shantytowns. These bad government decisions will cause a spike in poverty and misery, and a potential food and health crisis as the fickle and oversized World Health Organisation recognises, by saying that the first cause of death is poverty.

However, President Alberto Fernandez said recently: “I would prefer to have 10 per cent more poor people than 100,000 deaths in Argentina”. He also recently announced that he does not listen to economists because “they are not necessarily willing to save lives.” This is the justification for the creation of artificial poverty and spots of artificial famine, plus a growing social outburst at lower levels of our sinking social pyramid. He refuses to see that his policies are likely to create far more problems than the actual pandemic.

His measures will lead to far higher inflation, possibly even hyperinflation, cloaked by increasing shortages of the euphemistically called “sensitive goods”, as well as by bottlenecks in the circulation of money, that is waiting to be discovered when the lockdown is lifted.

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